Exxon earnings declines on crude prices, Shell rises on LNG

Exxon agreed to almost US$5-billion in acquisitions in the past six weeks to reverse the longest stretch of quarterly production declines in 13 years.

Exxon Mobil Corp., the world’s largest energy company by market value, said third-quarter profit dropped amid slowing growth in worldwide oil demand and a North American natural gas glut that lowered prices.

Net income was US$9.57-billion, or US$2.09 a share, compared with US$10.3 billion, or US$2.13, a year earlier, Irving, Texas- based Exxon said in a statement today. Profit was 13 cents more than the US$1.96 average of 19 analysts’ estimates compiled by Bloomberg.

Exxon Chairman and Chief Executive Officer Rex Tillerson budgeted about US$100 million a day this year to find oilfields, build gas-export terminals and upgrade refineries and chemical plants. The company agreed to almost US$5-billion in acquisitions in the past six weeks to reverse the longest stretch of quarterly production declines in 13 years.

Brent oil futures, the benchmark for two-thirds of the world’s crude, fell 2.4% during the quarter to an average of US$109.42 a barrel as global demand failed to keep pace with growing supply.

Exxon, the biggest U.S. natural gas producer, also was stung by a 29% plunge in gas prices to an average of $2.893 per million British thermal units during the quarter. Tillerson said in June that gas producers have been “losing our shirts” as drilling innovations allowed explorers to penetrate North American shale formations, leading to a supply glut.

Supply Surge

Global crude production increased by 2.16 million barrels a day during the third quarter from a year earlier, overwhelming demand that grew by just 540,000 barrels, according to an Oct. 12 report by the International Energy Agency. Rising oil usage in major economies such as China, Japan, India and Russia was insufficient to offset falling demand in the U.S., the world’s largest crude market.

Exxon agreed on Sept. 20 to pay about $2 billion in cash and assets for Denbury Resources Inc.’s drilling rights to 196,000 net acres in the Bakken Shale formation beneath North Dakota and Montana. The transaction will boost Exxon’s holdings in the region by about 50 percent, the company said at the time.

Last month, Exxon added more shale acreage to its portfolio with a $2.86-billion agreement to purchase Celtic Exploration Ltd. The acquisition, Exxon’s largest since the $35-billion takeover of XTO Energy in June 2010, will provide access to the Montney and Duvernay formations in western Canada.

Net income rose to US$7.14-billion from $6.98-billion a year earlier, Shell said Thursday in a statement. Excluding one-time items and inventory changes, profit was US$6.6-billion, beating the US$6.3-billion average estimate of 13 analysts surveyed by Bloomberg.

Earnings “benefited from the increased contribution from integrated gas, which included an additional dividend from an LNG venture,” said Shell, based in The Hague. LNG sales gained 4% to 4.97 million metric tons from a year ago, mainly reflecting the contribution from the Pluto project in Australia.

Shell, which expects for the first time to pump more gas than crude this year, is expanding LNG projects on rising demand from Asia. It’s the world’s largest supplier of the fuel and has interests in about a quarter of the LNG ships in operation.

“Although production volumes were relatively flat, the company again demonstrated very strong cash flow generation in spite of headwinds with U.S. gas prices,” said Richard Griffith, an analyst at Oriel Securities Ltd. in London.

Shell, which expects for the first time to pump more gas than crude this year, is expanding LNG projects on rising demand from Asia.

Third-quarter production fell about 1 percent to 2.982 million barrels of oil equivalent a day from a year ago partly because of works at fields in the North Sea, including the Shearwater platform, and shutdowns in the Gulf of Mexico because of Tropical Storm Isaac. Liquids production dropped 5 percent, while gas pumping was up 4 percent in the period.

Gas to Liquids

The Pearl gas-to-liquids plant in Qatar has been running at more than 85% of capacity in recent days, Chief Financial Officer Simon Henry said. “We are very much on track to finish ramping up towards full capacity in the fourth quarter.” Full- scale operation at the US$19-billion plant, the biggest in the world, was delayed from July because of maintenance.

Chief Executive Officer Peter Voser in February forecast 50% higher operational cash flow through 2015 on new projects. The Anglo-Dutch company, which scaled back shale-gas drilling in the U.S. to focus on oil, agreed in September to pay $1.9 billion to Chesapeake Energy Corp. for liquids-rich acreage in Texas.

“We have announced around $6 billion of acquisitions and new acreage and also around $6 billion of asset sales in 2012, which will better position Shell for growth,” Voser said in today’s statement.

U.S. Gas

In North America, the company ran 21 rigs drilling liquid- rich shale at the end of September, from six units a year ago, the CFO said. It halved dry-gas drilling to 15 rigs, focusing mostly on Pennsylvania’s Marcellus Shale and western Canada, and “there’ve been further movement there during October.”

Shell expects to pump about 50,000 barrels a day of oil equivalent from liquid-rich shale in Eagle Ford, Texas, by the year-end, Henry said in comments posted on the company website.

“We’ve seen prices touch $2” per million British thermal units in 2012 “whereas we don’t see any really of the shale gas plays as being economic at anything below $3 and most of them need $4 to $5,” Henry said. Shell plans projects on $4 to $6 per million Btu and sees $8 as “an upper limit” as buyers will switch to fuels such as coal for power generation, he said.

Net Charge

The earnings include a net charge of $298 million, “mainly related to onshore gas properties in North America.” BP and BG Group Plc wrote down the value of some U.S. shale assets when reporting second-quarter results.

“Impairments were more limited than some could have feared,” said Dominique Patry, an analyst at Credit Agricole Cheuvreux SA. “Given competitors’ massive write down in the second quarter, some were fearing that Shell would have to carry the same exercise.”

Shell spent about $600 million on new exploration license acquisitions in the quarter, including in Benin deepwater, the Gulf of Mexico and onshore North America. New acreage was also added offshore Australia, China, Malaysia and Ukraine, it said.